LLCs vs. S Corporations

LLCs and S Corporations are the two most commonly used legal structures in Florida for small businesses. What are the differences and which one is right for your business? First let’s go over the similarities. Both LLCs and S corporations are artificial entities created by filing with the State of Florida. They both offer limited liability, which means that the owners are typically not personally responsible for the debts and liabilities of the business. Both entities avoid double taxation because all profits and losses are passed through the business to the owners. Both are required to annually file reports and pay fees to the State. Both also have perpetual existence, meaning the business can continue to operate after the death of a shareholder or member.

Here are some of the differences:

Ownership & Operation

S Corps

• There are restrictions of who can be owners (shareholders) of an S corporation and the number of owners. None of the owners can be nonresident aliens or other corporations or LLCs. There cannot be more than 100 shareholders.
   

• An S corporation has more formalities it must adhere to and more extensive record keeping is required. Company profits must be distributed according to the ratio of stock ownership.
   

• There can only be one class of stock.
   

• Ownership is easily transferred by the sale of stock.

LLCs

• There are no restrictions on ownership of an LLC.
   

• An LLC is subject to less formalities than a corporation.
   

• Owners may participate in the management of the business.
   

• LLCs can have different classes of stock.
   

• Ownership interests cannot be transferred to other parties without some restrictions.
   

• LLCs can offer double asset protection. This means that members are not only protected from the company’s liability but that the members LLC assets are protected from the members’ liability. Any assets you put into an LLC can be safe from creditors in case of accidents, malpractice, bankruptcy, divorce, etc., It is recommended that the LLC have more than one member for this to be effective.

Tax Differences

• The owners of an LLC, by default, are considered to be self-employed and, because of this, the entire net income of the business is subject to self-employment tax. However, you can choose to have your LLC taxed as an S corporation so that some money can be taken out as salary (subject to self-employment tax) and some as dividends (not subject).
   

• Owner-employees of an S corporation are paid a salary that is subject to employment tax. The remaining income is paid as a distribution and is not subject to employment tax. This could potentially result in a substantial tax savings.
   

• Note: The IRS carefully monitors S corporations to make sure that they pay their shareholder-employees a “reasonable compensation” for services rendered to the company.

OVERVIEW

So which structure is right for you? It is very possible that either structure will suit your company’s needs. They are both very popular for a reason. They both offer tax or limited liability advantages over sole proprietorships, partnerships, and C corporations. LLCs are slightly more expensive to set up but less expensive to maintain. LLCs also do not have to comply with the required formalities of a corporation, such as meetings, minutes, etc. Furthermore, as long as there is more than one member, LLCs offer double asset protection whereas an S corporation does not. Finally, because the IRS allows an LLC to be taxed as an S corporation, any potential tax advantage is negated.

 

S Corporations vs. C Corporations

When forming a corporation, a small business has two options as to how they want to be taxed. They can be taxed as a C corporation or an S corporation. The main difference is that, with a C corporation, money paid out in dividends is taxed twice. It is taxed at the corporation’s rate as part of its profit, and then the stockholders are required to include the dividends they receive as income on their tax returns. This is commonly referred to as “double taxation”.

An S corporation, however, pays no income tax. All of the income or losses of the corporation for the year are passed through to the shareholders, who then report them on their individual returns. This is referred to as pass-through taxation.  Profits that are not part of the shareholder-employees salary are paid out in dividends and are not subject to employment tax.

• To qualify for S corporation status, certain requirements must be met. The corporation:
   

• Can have no more than one hundred shareholders
   

• can have only one class of stock
   

• must be comprised only by shareholders who are only individuals, estates, or certain qualified trusts. All shareholders must consent to the S election
   

• cannot have any shareholders who are non-resident aliens

All corporations are C corporations unless the necessary paperwork is filed with the IRS to change its status to an S corporation.